“Cash Float” or simply “Float” is upfront money that a business generates that can earn a return till the service or product is due.
Float
Float is essentially just other people’s money that a business is allowed to hold for a while, ideally at little or no cost, so that it can earn something on it before it has to deliver the service or product. Think of an upfront payment you make for an airline ticket months before you take that holiday. That money is available to the airline months before it actually incurs the cost. That’s float.
Float essentially negative working capital. However not all float are created alike.
There are a variety of businesses that generate float each with it’s own unique characteristic (cost and duration)
- Insurance
- Pensions/ Annuities
- Gift cards/ prepaid cards or memberships
Insurance Float
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Insurance business provides a guaranteed compensation for specified event such as loss, damage, illness, or death in return for payment of a premium. It can be long tenured (life) as well as short tenure float (P&C - property & casualty aka General Insurance.
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Negative cost P&C float is the most valuable float. Buffett in fact wrote about GEICO as “The security I like best”
Pension/ Annuities Float
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Pensions and annuities are financial products that provide a guaranteed regular income after a series of contributions. Annuity/pension float is longer tenured but typically positive-cost (have to pay crediting rates/benefits and hold more capital), and has less investment flexibility—so, dollar-for-dollar, it’s usually less valuable than insurance float.
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Capital rules (NAIC/Solvency II) and ALM requirements push life insurers toward duration-matched, spread-based portfolios and impose heavy capital charges on equities/structured residuals, which reduces the freedom to run a high-equity, high-concentration portfolio
